Market fundamentals are the primary movers of the financial markets. It is therefore important to know what economic indicators can induce movements in price of underlying assets, and how these can be traded in the binary options market.
1) Differentials in Interest Rates
A major market mover is not the interest rates per se, but rather what market players expect interest rates to be in the near future. Trades are then initiated based on these expectations. The direction and magnitude of interest rate changes can be detected from key statements made by various central bank heads. The situation is currently very interesting because most of the world’s major central banks have kept rates at near-zero levels to stimulate the markets and grow their economies through various quantitative easing programs. Markets have responded well in 2013 and 2014, surging to new record highs.
2015 will bring decision time, as some of the stimulus packages are going to be rolled back. This will be accompanied by a few rate increases here and there. Increase in interest rates brings increased returns on investments in vehicles such as the bond market and stocks. It also provides opportunities to profit from what is known as the carry trade in the forex market. The carry trade is a method of profiting from the interest rate differential that exists between two currencies by buying currencies with higher interest rates, and simultaneously selling currencies with lower interest rates.
Binary options traders should only be concerned with knowing when the smart money (institutional investors) are pushing money into the carry trade on the basis of interest rate differentials. The Barclays Capital Intelligent Carry Index™ (ICI) is an investment hedge fund which performs the carry trade. Watching the chart direction of the ICI is therefore an indication of where the carry trade is going. As a binary options trader, you can therefore set your CALL or PUT trades according to the direction of the chart of this fund. This will better suit binary options traders who are in this for the long haul, carrying positions for up to three months. Deutsche Bank’s Currency Valuation Excess Return Index can also be used to glean information as to where the big money is entering based on carry trades.
2) Central Bank Actions
Recently, the US Federal Reserve ended its quantitative easing program popularly known as Q4. Under Ben Bernanke, two clear targets were identified as being the benchmarks to be used for ending the program: unemployment rates down to 7%, and inflation beginning to push upwards so as to necessitate an interest rate increase. The expectation of rate increases in 2015 in the US which was sparked off by the end of Q4 has sparked a USD rally not seen for some time across major global currencies. Even emerging market economies in Africa are seeing their currencies lag behind this intense USD strength.
In addition, the US stock markets have extended their record highs. The S&P500 was just celebrating its new record highs set for 4 straight days in the first week of November 2014. The effects of the central bank action are also being felt in the commodity markets, where the price of crude oil has slid below $80 and is struggling to find support. So central bank actions can provide trading opportunities in the currency, stock and commodity markets.
As a binary options trader, your best approach to trading these opportunities are as follows:
a) American-style binary options
Use an out-of-the-money (OTM) strategy to trade crude oil, the USD Index, gold and copper. You can deploy these strategies on Cantor Exchange or NADEX all week from Monday 3 p.m. Eastern Time to Friday 3 p.m. Eastern Time. The reason behind using the OTM strategy is because this is what helps the trader benefit from the element of surprise, especially when there is uncertainty as to the direction of response of the market.
b) European-style binary options
Your best bet is a retracement entry. Here, you would wait for the trend to be formed, and then for profit taking retracement to occur. You can then set your trade on the retracement. For instance, if you want to benefit from falling crude prices, wait for an upside retracement and then set a PUT trade to benefit from this retracement. We will discuss a retracement entry strategy in a subsequent article so you know exactly how to pull off this trade.
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